XXL ASA

OSE:XXL

Earnings Call Transcript 2020-Q1

[Tolle O. R. Grøterud, Chief of Staff]

Good morning, ladies and gentlemen, and welcome to the XXL ASA's first quarter results presentation. My name is Tolle Grøterud, and I have the pleasure of guiding you through today's presentation. And our new CEO, Pål Wibe; and our CFO, Stein Eriksen, will take you through the results and the key drivers followed by a Q&A session. And for media, there will be an opportunity to perform separate interviews after the presentation and then using digital channels. So please direct your requests to our press contact. So without further introductions, I turn the floor over to you, Pål.

[Pål Wibe, Group Chief Executive Officer]

Thank you, Tolle. Thank you. It's a pleasure to be here. Of course, a little bit strange to stand in front of an empty room, but it's a corona situation, and everyone has to comply by that. The first and foremost priority we have in these days is, of course, to ensure the safety of our people and our customers. And I'm very happy that we've been able to keep all stores open throughout the corona crisis. That is a big credit to the team for making that possible. So that's -- very happy about that. Let us go through the presentation. My name is PÃ¥l Wibe, as I said. For those of you who haven't met me before, I've sort of been in retail most of my adult life. This is what I love, and this is what I know. I'm a passionate retailer, but I'm also a passionate sports enthusiast like many others at XXL. In fact, I actually think that I'm going to have a tough time making the cut for the football team at XXL because there's a lot of athletes in the company. But I'm also here because I am a strong believer in the uniqueness of the concept, and I've been that for a very long time. I think it's very rare to see a concept that is -- has the fundamentals to really be the leading chain in Europe. And there are 3 reasons for it. First of all, it's the buying power of the XXL concept, it's the cost efficiency from the factory to the consumer, and it is the unique network of big-box stores that enable us to have both the breadth and depth of assortment, but also to serve as an omnichannel experience for the customers. So I think there's something unique about the XXL concept, and I'm very, very happy in the next few years together with the team to be able to demonstrate that. As we said, it was a very tough and challenging quarter, really like a rollercoaster around sales. We had a rough winter season, as you know from before. Then we did inventory sell-down in order to be ahead and make sure that we have the healthy balance sheet. And then, of course, when everything started to get closer to normal, the COVID-19 situation erupted, and everyone had to change everything. So a challenging quarter, but also beyond and beneath the figures, a lot of positive things happening that I'll come back to. We had a positive like-for-like in the quarter, and that was -- that is, in itself, very positive. Also very positive that we had e-commerce growth and high numbers again. It's some time since we did that and that we gained market share in all countries. The results were negative for the obvious reasons, the lack of winter, the sell-down, the COVID-19 situation. But as I said, if you look beneath the figures, you see some very, very interesting fundamentals and a basis for future growth. And of course, in a situation where we have the corona crisis, having cash in the bank and having a much lower inventory is always healthy and good. This is just a figure to demonstrate that we are -- we had to gain market share in all markets. We show the monthly figures now just to sort of demonstrate that it has been a very fluctuating quarter. We really encourage you not to look at monthly figures, of course, but more to look at the figures over a longer period of time because, of course, we want to beat the market but over a long period of time. The COVID-19 situation was really something special, and I'm sure that everyone has heard about it in many quarterly presentations. As I said before, the first and foremost concern was to ensure the safety of our staff and the customers that they can shop in a safe environment. As you can see from the figures here, physical stores has gone down since the eruption of the corona crisis on the 12th of March in Norway, and Norway less than the other markets. And of course, e-comm has grown quite significantly, not just at XXL but all over. And of course, we are very happy to have a very healthy and solid e-commerce operation. And of course, you can also look -- when you look into the category figures, there's a lot of interesting things for the scientists. There's something about Norwegians and hammocks. Because in Norway, we've actually sold 20,000 hammocks, and that is -- in this period, that is actually more than 10x as much as Sweden and Finland combined. So there's something about Norwegians and hammocks. And I think if you go venture into the forest area outside of Oslo, you understand why. Yes. For the financials, Stein, I think you will take us through it, and I will come back later.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Thank you, PÃ¥l. Okay. So let's move over to the financial review of the first quarter of 2020. As PÃ¥l already mentioned, it has been certainly a rollercoaster, the quarter 1, and it has been affected by several factors. I mean, lack of winter conditions in the quarter combined with COVID-19 made it difficult for all players in the industry. And as you know, XXL responded quickly with a major effort to clear out the winter inventory, to preserve cash and allow for an attractive and up-to-date product offering next winter. This led to strong sales, weak margins, but a solid financial situation entering the second quarter. We have tried to sum up the different events on this following slide. As you already know, we had a weak January month related to both challenging winter conditions in addition to loss of market shares in Norway and Sweden. Then we launched the clearance campaign in February, and this had significant top line effects, contributing positively to the group's cash flow and liquidity. But, of course, selling out products for NOK 400 million at 0 margins significantly diluted our margins and, of course, gave negative cannibalization effects on existing base assortments. Also, XXL has, during the 5 last months, reduced purchasing of goods with more than NOK 1 billion. And only in the quarter alone, we reduced purchased goods of more than NOK 500 million. This had negative EBITDA effect due to lower supply bonuses. But once again, it reduced inventory and increased liquidity. And as you all probably are aware of, we did -- we secured a refinance of the group with New Loan Facilities of NOK 1.450 billion and a share issue of NOK 400 million, and this also gives us more flexibility going forward. And then the COVID-19 situation, but PÃ¥l already mentioned, minus 23% from 12th of March and throughout the month. That hit us with more than NOK 100 million in lost sales during the last 2.5 weeks of the first quarter. The 2 first events had short-term negative effects on the P&L, but it strengthened once again our balance sheet, and it gives us a stronger base going forward. Okay. Key figures. As you can see from the P&L, the top line is positively affected by the clearance sales, contributing to sales growth of 2.8% and -- oh, 7%, sorry, and a like-for-like growth of 2.8%. Also on the gross margins, you can see the significant effect from the clearance sales and the lower supply of bonuses. These 2 together contributing with -- or explained about 9.3 percentage points of the total gross margin decline of 12.8 percentage points. Moving over to the segments. 2 out of 5 segments had positive like-for-like growth driven by the clearance campaign in February, March. And on the positive side, we had like-for-like growth, as PÃ¥l mentioned, for the first time since Q2 2018 and also the strong e-comm growth of 35%. All segments are, of course, affected by the COVID-19 situation, and especially in Austria, where we had to close down all the stores from mid-March. And in Sweden, XXL has experienced significant decline. We're talking minus 90% decline versus last year related to our outlet stores close to the Norwegian border. Moving over to gross margins. As you can see, heavily diluted by the once again clearance campaign and reduced supply of bonuses. We have tried to bridge the gross margins from Q1 '19 to Q1 '20. First of all, we had lower margins on our base assortment explained by somewhat more aggressive pricing, both in January during the clearance campaign where we put on some extra offers to reinforce the campaign and most likely during COVID-19 where we focused on securing cash flow. During February and March, as already mentioned, we sold out significant part of our portfolio, more than NOK 400 million with 0 margin. And this, of course, also dilutes our margin with more than 5 percentage points. And then once again, the supplier -- lower supply bonuses had a negative effect on margins with 4 percentage points. OpEx, from 31.2% last year up to 31.8% this year. Main driver, more stores, 6 more stores and increased HQ cost of around NOK 32 million. And increased HQ cost is mainly related to ongoing improvement programs, refinancing and contingency plans related to the COVID-19 effects. I estimate around half of the HQ cost is related to these actions. EBITDA, from NOK 192 million last year to minus NOK 83 million this year. And the bridge is here. Lower margins, once again, on our base assortment with estimated effect of NOK 62 million. Then we have the cannibalization on base assortment that had a negative effect of NOK 83 million. Lower supplier bonuses, once again, with NOK 71 million. We had more stores with an extra cost base of NOK 25 million. And then once again, the HQ restructuring of NOK 32 million, bringing us down to 83 -- minus NOK 83 million in the quarter. Moving over to net debt development. XXL had a positive cash flow from operations in the period, and it's all driven by lower inventory, around NOK 540 million decrease since December 2019. Also, we had CapEx of NOK 47 million driven by 2 stores, and also, we have increased our capacity in our Norwegian Central warehouse. We used money, the NOK 95 million from the subsequent offering, to pay down debt. Then we have lease obligations -- or, sorry, rental obligations of NOK 155 million, NOK 154 million that we paid during the quarter. And then we have a negative FX effect of NOK 102 million in the quarter due to the weakened Norwegian kroner. That brings us to a net debt of NOK 1.3 billion. And also this states it in a little bit different way. But once again, we have positive cash flow of NOK 145 million. It's an increase towards last year of NOK 248 million, once again, driven then by the lower inventory. Our liquidity reserves ended at NOK 774 million, significantly up from last year of NOK 400 million, and our net interest-bearing debt is down from NOK 2.1 billion to NOK 1.3 billion. So some last words about the balance sheet of XXL. During Q1 and Q2, XXL has strengthened the balance sheet, working along several dimensions. Firstly, and the most important thing, we have worked with our own balance sheet, reducing inventory with NOK 900 million versus last year. This is a combination, as I already said, of reduced purchased goods and the clearance sales. We will do a share issue of NOK 400 million in Q4. And finally, we have negotiated with the bank with New Loan Facilities of NOK 1.450 billion, and this gives us some more flexibility going forward due to the fact that we will only have liquidity covenant until Q3 2021. So that was the final review. Handing over the floor to you, PÃ¥l, with some final remarks.

[Pål Wibe, Group Chief Executive Officer]

Thank you, Stein. Yes, some closing remarks. As we said before, the quarter #1 was a lot about reducing purchasing budget, full selling off a substantial part of the inventory, securing long-term funding. In many ways, as you know, I like to use triple metaphors, and in Q1 and in Q2, we will focus on the defense. Because I'm told -- even though I'm an Eidsvold Turn supporter, I've been told that if you want to win titles, you have to shore up your defense, and your defense in retail is your inventory and your cost base. And in this quarter and going forward, we will focus on the inventory and the cost in order to shore up our defense. We've done that, and focusing on inventory, but also looking at -- we will also start looking at all types of costs and creating better efficiency in the way we work together in the company. And then going forward, we will focus gradually more and more on the strategic actions we need to take in order to get on the offensive. It's about marketing, about in-store experience, about the omnichannel in addition to repositioning XXL as the sports specialist with the lowest prices. And in my view, maybe the most important thing we do long term is that if we want to gain the trust of the customers and increase the top line again, we need to do things that the customers recognize. And if we can change everything that the customer recognize in a positive way, we believe that we can gain the trust of the customers once again. And the 3 key areas we're going to focus on is, first and foremost, the products, it's the category plans, the main reason for why you come to an XXL store. Then it's the concept, with more distinct shop-in-shops, emphasizing our specialist position in each area. And then it is a modernized and reenergized brand platform, which is basically all the look and feel that you meet on our web page and on -- in the physical world. And we will work on all of these 3 key areas in the quarters to come. This is not something that will be finalized by the end of second quarter or third quarter. But I think, long term, this will be key for the journey that we are starting on at XXL. In retail, you also know that strategy is one thing, but execution is, of course, always more important. And if you want to execute well, you need a good team. And I see the basis of a fantastic team at XXL now. Most of the players are in place now with the recruitment of Andre and Claes in senior positions. There are a few more left that we will conclude in the second quarter, and I'm really excited about the team that we are putting together at XXL. And I think this is key, together with the culture of the company, in order to achieve the long-term success of XXL. So to summarize, it has been an extraordinary quarter, a little bit of a rollercoaster. But we laid the foundation for something exciting going forward, focus on inventory and cost and efficiently, creating efficiency, working in a more effective way now, but later on, shifting to the other side of the play -- the soccer field and working on everything that the consumer can recognize. The COVID situation has created, of course, a lot of turbulence for us and for many other players in the retail industry, but I'm sort of very impressed by the team and the way we have sort of turned around from an initial very negative development. And then in April, we are overall in black figures, and I'm very satisfied with that on behalf of the team. So I think it demonstrates the agility and the energy of the XXL team, and that looks promising for the future. So with that, I think we will open up for questions from the audience.

[Tolle O. R. Grøterud, Chief of Staff]

So great. Thank you, PÃ¥l and Stein. So then we open up for questions. And I then call upon the conference host for further introductions. So please go ahead.

[Operator]

So with me stating that, did you want to have the phone questions first or the questions in the room first?

[Tolle O. R. Grøterud, Chief of Staff]

We don't have any participants in the room, so we will have it from you, please.

[Operator]

Okay, sorry. Yes. Did not understand that. One second, please. [Operator Instructions] And we do have a question coming from Petter Nyström from ABG.

[Petter Nyström, Lead Analyst]

A couple of questions from me. First of all, if we look at the gross margin, how should we think about supplier bonuses over the next coming quarters here and the potential negative effect on the gross margin?

[Stein Alexander Eriksen, Group Chief Financial Officer]

Yes. The thing is, now we start to see that we are down to a more healthy level at inventory. We are down to NOK 2.5 billion. And as I said, we have reduced purchasing quite significantly with NOK 1 billion during the last 5 months. I think, to be honest, still, we will probably reduce our purchase -- purchasing somewhat also in Q2. But the situation is, to be pretty honest with you, pretty unclear due to the whole COVID-19 situation. Suddenly, we can be forced to close down several stores, and then -- yes, so -- but in Q2, I still expect reduced purchasing, but not in the same amount as what you saw in Q1.

[Petter Nyström, Lead Analyst]

Then a follow-up question, please. You also indicated that April has started with decent sales in Norway and Sweden. Is it possible to give some comments whatsoever on the gross margin there compared to what we saw in Q1?

[Stein Alexander Eriksen, Group Chief Financial Officer]

We still see that we have focused more on cash than margins also in Q2, but it's, of course -- remember, we had a clearance campaign in Q1. So most of the gross margin effect is taken in Q1. So you will not see the same negative effects in Q2, but the margins are somewhat lower, a little bit lower than what it was in Q2 last year, but we are working on that.

[Petter Nyström, Lead Analyst]

And then a final question, if I may. Headquarter cost was up year-over-year. Can you give us some guidance on what we should expect for the next coming quarters?

[Pål Wibe, Group Chief Executive Officer]

No. I think we are early in the quarter, and I think that we should -- the main focus is, as I said, that they are on -- we had sort of figures in black and that some guidance, as Stein said. But I think going in detail about the expectations for the next quarter is -- it's uncertain times, and I think you'll have to wait until Q2 to get those figures.

[Operator]

[Operator Instructions] The next question comes from Markus Heiberg from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

Yes. So 2 questions from me. The first one is on the inventory. And what is now the share of the impaired inventory that was sold in Q1? You said the 0 margin, by definition, sales in Q1. Can we expect some 0 margin sales in Q2 as well? Or how does this -- that's the first one.

[Pål Wibe, Group Chief Executive Officer]

As I said, we are not going to have any bigger clearance campaign in -- or, at least, we haven't planned for it. But of course, we don't know what's going to happen with the COVID-19 situation, but we haven't planned any big clearance campaign in Q2. So like I said, you can expect more normal margins in Q2.

[Markus Borge Heiberg, Equity Research Analyst]

All right. So the impaired goods are not sold?

[Pål Wibe, Group Chief Executive Officer]

Sorry?

[Markus Borge Heiberg, Equity Research Analyst]

Yes. So the impaired goods are not sold?

[Stein Alexander Eriksen, Group Chief Financial Officer]

Have not sold out all the impaired goods. We have -- remember, we had around NOK 400 million in accruals in Q4, and we have around NOK 200 million left in that accrual.

[Markus Borge Heiberg, Equity Research Analyst]

Okay. So the second question is on, say, the specialist position that you want to take on. So this is more to PÃ¥l, I guess. So you want to be the specialist with the lowest cost and the lowest prices. Do you consider this, firstly, have value for money position or a specialist position, or both? Is it -- how do you intend to differentiate from the competition? And how do you want to be perceived by the consumers to kind of really differentiate from, say, Sport 1 and other competitors?

[Pål Wibe, Group Chief Executive Officer]

I think that the uniqueness of the XXL concept is that you have a large, big boxes where you actually can have both. You can have the assortment of our specialist within some prioritized segments, and you always can trust that XXL has the lowest prices always. So I think it is a combination that we want to work long term on creating that position within each shop-in-shop. So make the shop-in-shop more clear and more distinct towards the consumers, so that the consumers can see the competence and the breadth and depth of our assortment.

[Operator]

[Operator Instructions] At the moment, there is nobody in the queue. [Operator Instructions] We don't have any other questions coming through in this queue line. So I will hand the call back to you again. Thank you.

[Tolle O. R. Grøterud, Chief of Staff]

Thank you. So crystal clear then.

[Pål Wibe, Group Chief Executive Officer]

Very good. Very good.

[Tolle O. R. Grøterud, Chief of Staff]

So that ends our session. So thank you all, and have a nice day.

[Pål Wibe, Group Chief Executive Officer]

Thank you.